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UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
__________________
No. 91-4401
__________________
ESTATE OF DOROTHY J. WARREN, Deceased,
River Oaks Trust Company and R. Clay
Underwood, Co-Administrators with will
annexed of the Estate of Dorothy J.
Warren, Deceased,
Petitioner-Appellant,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
______________________________________________
Appeal from a Decision of the United States Tax Court
____________________________________________
(January 13, 1993)
Before REYNALDO G. GARZA, GARWOOD, and DUHÉ, Circuit Judges.
GARWOOD, Circuit Judge:
Petitioners-appellants, the estate of Dorothy J. Warren and
its administrators (together, the Estate) appeal the judgment of
the United States Tax Court essentially upholding the Internal
Revenue Service's estate tax deficiency determination against the
Estate. We reverse.
Facts and Proceedings Below
The deceased, Dorothy J. Warren (Warren), a Texas resident,
was a wealthy divorcee with several children and grandchildren, and
an affinity for two catholic charities in Houston (the Charities).

When she died on May 27, 1983, she left a will, executed in 1981,
disposing of her estate, which at the time of her death had a gross
value of approximately $28 million. Most of the estate's assets
consisted of oil and gas leases, or interests therein, in Texas and
Louisiana. Article V of the will put the bulk of the estate into
two equal residuary trusts, the Charitable Lead Children's Trust
and the Charitable Lead Grandchildren's Trust (the Trusts). The
Trusts provided for a fixed annual annuity payment to the Charities
for twenty years. The annuity amount was specified as "an amount
equal to eight and one-half percent (8½%) of the initial net fair
market value of the assets constituting the trust." The annuity
amount was to be paid every year from trust income. If excess
income were generated in a year, such excess was to be added to the
trust corpus. If the income was not sufficient to pay the annuity
amount, however, the balance would be paid out of the trust corpus.
At the end of twenty years, the remaining trust assets were to
be distributed to the children and grandchildren. This arrangement
was instituted primarily to further Warren's testamentary goals in
a way that minimized the tax burden on the estate. The large
guaranteed annuities to the Charities assured that much of the
estate would qualify for the charitable bequest deduction of
Internal Revenue Code (Code) § 2055(a) & (e)(2)(B), 26 U.S.C. §
2055(a) & (e)(2)(B) (West 1989).
Warren's will was admitted to probate in September 1983 in
Probate Court No. 3 of Dallas County, Texas (the Probate Court).
Between 1983 and 1987 approximately sixteen separate law suits were
filed by or against the estate in the Probate Court, including
2

suits by creditors and suits challenging the construction and
administration of the will and estate. These suits involved, among
others, all the beneficiaries and legatees of the will and dragged
on for several years.
Because of the reorganization of several of the business
enterprises that comprised a substantial part of Warren's assets,
the administrative expenses incurred throughout the long course of
the probate proceedings swelled to over $8.5 million by July 1988
and over $9 million by November 1989. Approximately $2 million of
these expenses were paid from Estate principal. Due to the
extended time involved, the Estate also realized substantial
postmortem income from the Estate's assets.1 Article III of
Warren's will provided that:
"All of my just debts, funeral expense, administration
and testamentary expenses, and all estate, inheritance,
transfer, and succession taxes . . . shall be paid out of
my residuary estate passing under Article V hereof,
without apportionment."
Article V of the will states that "'my residuary estate'" is
to "consist of my entire testamentary estate after satisfaction of
any gifts under Article IV hereof, and after payment of those
debts, expenses, and taxes referred to in Article III hereof."
Because the huge administrative expenses, if deducted from the
residuary corpus, would have substantially reduced the annuity
amount, the Charities brought suit in the Probate Court claiming,
inter alia, that these expenses should be paid out of residuary
1
By "postmortem income" we mean income derived from estate
assets between the time of Warren's death and the time the
probate of her estate was substantially completed.
3

postmortem income rather than the residuary corpus.2 The parties
found ambiguity in the will's use of the terms "residuary estate"
and "initial net fair market value" and argued extensively about
whether the administrative expenses should be charged to the
residuary corpus or postmortem income.
The parties to most of the suits, including the
administrators, the Charities, the children and grandchildren, and
most claimants against the Estate, were finally able to reach a
settlement of their claims in July 1987. Included in this omnibus
settlement was a provision that Article III of the will would be
restated to allocate payment of all administrative expenses out of
the residuary postmortem income, not out of the residuary corpus.
The Probate Court modified and approved the settlement and
entered an agreed final judgment in September 1988. The Probate
Court found that because (i) the income from the oil and gas
2
This postmortem income consisted largely of income from oil
and gas holdings of a kind that the provisions of the Texas Trust
Code, Tex. Prop. Code Ann. § 113.107(d) (West 1984) (formerly
Vernon's Ann. Tex. Civ. Stat. art. 7425b-33), direct that trusts
apportion 27½% (but not to exceed 50% of the net after deducting
the property's expense and carrying cost) to trust corpus and the
balance to income. The Texas Trust Code also provides that "[i]f
an asset becomes subject to a trust under a will, it becomes
subject to the trust as of the date of the death of the testator,
even though there is an intervening period of administration of
the testator's estate," Tex. Prop. Code § 113.103(a) (formerly
Vernon's Ann. Civ. Stat. art. 7425b-28) and that "[i]f the
provisions of . . . [the Texas Trust Code] and the terms of a
trust conflict, the terms of the trust control." Id. §
111.002(a). Article II of the Will granted the estate's personal
representative, among other things, "all of the rights and powers
conferred upon a trustee by the Texas Trust Act and other laws of
Texas." Texas Property Code Ann. § 113.019 (West 1984) (formerly
Vernon's Ann. Tex. Civ. Stat. art. 7425b-25) grants trustees the
power to compromise and settle claims.
4

interests would be allocated 27½% to principal and 72½% to income,3
and (ii) the postmortem income was the only liquid asset available
to the residuary estate to pay the administrative expenses, the
administrative expenses should be allocated accordingly. Thus, the
agreed final judgment provided that 27½% of the administrative
expenses would be charged to the residuary corpus and 72½% of the
administrative expenses would be charged to residuary postmortem
income.4 It was also provided that the annuity amount would in no
event be less than $1,471,575.81 per year.
Respondent-appellee, the Commissioner of Internal Revenue (the
Commissioner), having asserted an estate tax deficiency, the Estate
filed a petition for redetermination in the Tax Court. Most of the
issues were settled.5 However, there remained for trial the issue
3
See note 2, supra.
4
The judgment provided that the will's Article V "the initial
net fair market value of the assets constituting" each of the two
Trusts would be one-half of the amount calculated as follows,
viz, the total gross estate as calculated for federal estate tax
purposes less the specific bequests in Article IV, less 27½% of
the administrative expenses paid to date, and less all of each of
the following: funeral expenses, debts of decedent, mortgages
and liens, and federal estate taxes and state death taxes.
5
The initial estate tax return filed by the Estate in 1984
left many of the crucial items blank or "undetermined." The
Commissioner issued a notice of deficiency in the amount of
$34,340,734.68, which the government's brief states was "based
largely on the values for the assets and debts of the estate
contained in the Marriage Settlement Agreement between the
decedent and her former husband that had been executed the year
before her death," although the Estate asserts that "the bulk" of
the deficiency "resulted from" the Commissioner's position that
the Charities "were not qualified charitable organizations." In
any event, it was eventually agreed: that the value of the total
gross estate for estate tax purposes was $28,352,319.92; that as
of July 31, 1988, the Estate had incurred and paid $8,523,834.44
($9,085,849.61 as of November 28, 1984) in administrative
expenses and that such expenses were allowable as a deduction for
5

of whether in calculating the amount of the estate tax charitable
deduction for the bequest to the Trusts under Article V of the will
the amount of "the initial net fair market value of the assets
constituting the" Trusts should be reduced by one hundred percent
of the Estate's administrative expenses, as claimed by the
Commissioner, or only by the 27½% thereof pursuant to the Probate
Court's judgment, as asserted by the Estate. The Tax Court agreed
with the Commissioner, determining that it was not bound by the
Probate Court's judgment and that under Texas law Warren's will
required that all the administrative expenses be charged to the
residuary corpus before computing "the initial net fair market
value of the assets constituting the trust," eight-and-one-half
percent of which was to constitute the annual annuity amount
payable to the Charities over the twenty-year term. Following the
Tax Court's opinion, final judgment was entered on the basis of an
agreed "Computation For Entry of Decision." The effect of the Tax
Court's decision was to reduce the amount of the annual annuity
payable to the Charities, for purposes of the estate tax charitable
deduction, from some $1,471,575, under the Probate Court's
judgment, to $878,131, with a consequent reduction in the estate
tax charitable deduction from some $16,878,827 to $10,072,070.6
estate tax purposes under Code § 2053(a)(2) to the extent the
Estate elected to so deduct them (and not to deduct them for
income tax purposes, see Code § 642(g)); that the Charities were
qualified charities for the purposes of the estate tax charitable
deduction (Code § 2055(a)); and that the Article V bequest to the
Charities was in the form of a guaranteed annuity for purposes of
Code § 2055(e)(2)(B).
6
The Computation For Entry of Decision calculated the estate
tax charitable deduction amount as 11.4699 times the amount of
6

The Estate timely perfected this appeal.
Discussion
In determining that it was not bound by the decision of the
Texas Probate Court in allocating administrative expenses, the Tax
Court relied on C.I.R. v. Estate of Bosch, 87 S.Ct. 1776 (1967).
In Bosch, and its companion case of Second National Bank of
New Haven v. United States, the Supreme Court reviewed decisions of
the Second Circuit from New York and Connecticut, respectively
C.I.R. v. Estate of Bosch, 363 F.2d 1009 (1966), and Second
National Bank of New Haven v. United States, 351 F.2d 489 (1965),
in which the estate tax marital deduction was at issue. The New
York case involved a revocable trust established by the decedent in
which his surviving spouse had had a life estate with a general
power of appointment as to which she subsequently, but before his
death, executed an instrument purporting to release the general
power and convert it into a special power. The Commissioner
disallowed the marital deduction because the surviving spouse did
not have a general power of appointment, due to the release
instrument. While the case was pending in the Tax Court, the
the 8½% annual annuity, or 97.49415% (8½% x 11.4699) of the
corpus of the Trusts ($10,330,948.61 after deducting from the
residuary estate, inter alia, all the $9,085,849.61 in
administrative expenses). See 26 C.F.R. §§ 20.2031-10 (Table B),
20.2055-2(e)(2)(vi), 20.2055-2(f)(2)(iv). The allowed estate tax
deductions also included $3,855.05 funeral expenses,
$1,656,925.75 debts, $4,809,843 mortgages and liens, and
$9,085,849.61 administrative expenses (exclusive of interest).
The Estate received the right, in the event the Tax Court's
decision were reversed, to deduct less than all of such
administrative expenses for estate tax purposes, presumably so
that in that event it could instead deduct such expenses for
income tax purposes. See Code § 642(g).
7

estate filed a proceeding in a New York trial court to declare the
release a nullity, and the New York trial court so declared it. As
the Second Circuit's opinion reflects, it was conceded that the
state proceeding was brought at least partially for the purpose of
affecting the outcome of the Tax Court case, all concerned in the
state case took the position there that the release was a nullity,
and no contrary argument was presented to the state court. Bosch,
363 F.2d at 1011. The Tax Court and the Second Circuit, over Judge
Friendly's dissent, held for the estate on the basis of the state
trial court judgment, even though it was recognized that the state
proceedings were essentially "non-adversary." Id. at 1013. The
Connecticut case involved a dispute as to the amount of the marital
deduction, which turned on whether the state statute apportioning
estate and inheritance taxes in the absence of a contrary provision
in the will applied, with a greater marital deduction resulting if
the statute applied. After the Commissioner asserted a deficiency
based on the inapplicability of the apportionment statute, the
executor filed an application in the Connecticut Probate Court to
have the estate taxes prorated under the statute, and all charged
against the trust for the grandchildren rather than the marital
deduction trust. Others interested in the estate, including the
other beneficiaries under the will, though cited, did not contest
the application, and some filed statements of no objection. The
Probate Court granted the application. Bosch, 87 S.Ct. at 1780.
The Second Circuit ultimately affirmed a summary judgment in favor
of the Internal Revenue Service (IRS) on this issue, holding that
the will unambiguously reflected that the state proration statute
8

would not apply, and that the Probate Court's contrary decision did
not require a different result, noting that the judges of such
courts are laymen and their decisions "are even subject to
collateral attack in another probate district." Second National
Bank of New Haven, 351 F.2d at 494.
The Supreme Court affirmed in the Connecticut case and
remanded to the Second Circuit in the New York case, holding that
the respective state trial court decisions were not to be given
"controlling" effect. Bosch, 87 S.Ct. at 1782.
The Supreme Court initially noted that "at least three
positions have emerged among the circuits" respecting the effect of
state trial court decrees "where the matter decided there is
determinative of federal estate tax consequences." Id. at 1781.
It next described these positions without evaluating them. The
first it characterized as treating the state court ruling as
decisive if the issue was "fairly presented for its independent
decision" and was "binding upon the parties under the state law."
Id. The second position, characterized as "[t]he opposite view"
and one which "seems to approach" the methodology employed in
diversity cases to determine state law, was that the federal courts
would be bound by the state court ruling "only after independent
examination of the state law as determined by the highest court of
the State." Id. The third view, advocated by the government as
"an intermediate position," was that "a state trial court
adjudication is binding in such cases only when the judgment is the
result of an adversary proceeding in the state court." Id. at
1782.
9

The next paragraph of the Court's opinion commences by stating
"[w]e look at the problem differently." Id. The Court explains
"[f]irst" that neither res judicata nor collateral estoppel apply
to the cases before it because the Commissioner was not a party to
either of the state court proceedings. It then observes that "both
state proceedings were brought for the purpose of directly
affecting federal estate tax liability." Id. "Next" the opinion
points out that because the issue before it involves "a federal
taxing statute," the Court "must look to the legislative history
surrounding it," and then observes:
"the report of the Senate Finance Committee recommending
enactment of the marital deduction used very guarded
language in referring to the very question involved here.
It said that 'proper regard,' not finality, 'should be
given to interpretations of the will' by state courts and
then only when entered by a court 'in a bona fide
adversary proceeding.' S.Rep. No. 1013, Pt. 2, 80th
Cong., 2d Sess., 4. We cannot say that the authors of
this directive intended that the decrees of state trial
courts were to be conclusive and binding on the
computation of the federal estate tax as levied by the
Congress. If the Congress had intended state trial court
determinations to have that effect on the federal
actions, it certainly would have said soSQwhich it did
not do. On the contrary, we believe it intended the
marital deduction to be strictly construed and applied.
Not only did it indicate that only 'proper regard' was to
be accorded state decrees but it placed specific
limitations on the allowance of the deduction as set out
in § 2056(b), (c), and (d)." Id.
The Court goes on to say that "[t]his is also in keeping with
. . . the Rules of Decision Act, 28 U.S.C. § 1652" and the Court's
precedents holding that "even in diversity cases" decisions of
"'lower state courts'" though "'attributed some weight'" are not
"'controlling'" if "the highest court of the State has not spoken
on the point." Id. It then notes that:
10

"[t]his is not a diversity case but the same principle
may be applied for the same reasons, viz., the underlying
substantive rule involved is based on state law and the
State's highest court is the best authority on its own
law. If there be no decision by that court then federal
authorities must apply what they find to be the state law
after giving 'proper regard' to relevant rulings of other
courts of the State." Id. at 1873.
The concluding substantive paragraph of Bosch states "[w]e
believe that this would avoid much of the uncertainty that would
result from the 'non-adversary' approach and at the same time would
be fair to the taxpayer and protect the federal revenue as well."
Id.
The precise scope and meaning of Bosch as applied in
dissimilar contexts is difficult for us to ascertain. The Court's
language "[w]e look at the problem differently" suggests that it
was not entirely agreeing with any of the three general positions
described, but not evaluated, in the immediately preceding
paragraph of the opinion. Later language in the opinion, however,
indicates that it was adopting the second position (although it
never expressly so states). Was the Court, perhaps, leaving open
the proper approach in other contexts, such as federal tax
consequences not relating to the marital deduction, which is so
heavily emphasized as a ground for decision? We note in this
connection that Bosch distinguished Blair v. Commissioner, 57 S.Ct.
330 (1937), an income tax case, on the ground that it "involved the
question of a property right determination by a state appellate
court." Bosch, at 1781 n.3. Bosch also involved state trial court
decrees in cases brought by the taxpayer "for the purpose of
directly affecting federal estate tax liability." Moreover, the
11

opinion makes clear that adversarial positions were not taken by
the parties in the state cases, notwithstanding its seeming
rejection of "the 'non-adversary' approach." Some authorities have
concluded that Bosch does not vitiate the significance of bona fide
adversarial settlements. See Waldrup v. United States, 499 F.Supp.
820, 824 n.4 (N.D. Miss. 1990); but see Estate of Brandon v.
C.I.R., 828 F.2d 493, 499 (8th Cir. 1987) (marital deduction case;
Bosch applies to good faith adversary settlements).
In the estate tax charitable deduction area, though without
citing Bosch, controlling effect has frequently been given to bona
fide settlements of adversarial litigation not instituted for tax
purposes. See Flanagan v. United States, 810 F.2d 930 (10th Cir.
1987); Estate of Strock v. United States, 655 F.Supp. 1334 (W.D.
Pa. 1987); Northern Trust Co. v. United States, 41 A.F.T.R.2d 78-
1523 (N.D. Ill. 1977);7 Rev. Rul. 89-31, 1989-1, C.B. 277 (revoking
prior contrary ruling and holding "[i]n situations involving
settlements of bona fide will contests the Service will no longer
challenge the deductibility of immediate payments to charities
solely on the ground that they were made in lieu of a split
interest [provided for in the will] that would not constitute an
allowable deduction under section 2055(e)(2) of the [Internal
Revenue] Code"); Technical Advice Memorandum 8948004 (August 25,
1989).8
7
Northern Trust Co. has frequently been cited with approval.
See, e.g., Oetting v. United States, 712 F.2d 358, 361 (8th Cir.
1983); First National Bank of Fayetteville v. United States, 727
F.2d 741, 748 (8th Cir. 1984); Rev. Rul. 89-31, 1989-1, C.B. 277.
8
This directive applied Rev. Rul. 89-31 to a situation where
12

In Brown v. United States, 890 F.2d 1329, 1341-43 (5th Cir.
1989), we considered Bosch and ultimately concluded that "[t]he
relevance of a state court's judgment to the resolution of a
federal tax question will vary, depending on the particular tax
statute involved as well as the nature of the state proceeding that
produced the judgment." Id. at 1342.9 We apply that test here and
conclude that the Tax Court erred by not giving effect to the
Probate Court judgment.
The tax statute involved here is the provision for estate tax
charitable deduction, Code § 2055. In this respect, we are aware
of no legislative history comparable to that cited in Bosch with
the bona fide settlement not only gave the charity an immediate
payment in lieu of the nonqualifying split interest provided for
it in the will, but also provided that the charity would be
exonerated from paying any portion of the estate taxes
notwithstanding that the "will specifically provides that estate
taxes are to be paid out of the charitable residue as an expense
of administration without apportionment." In reaching this
result it is stated "[a] bona fide settlement agreement results
in a restructuring of the terms of the will so that the
beneficiaries' interests are based on the restructured will. See
Rev. Rul. 89-31, supra. Thus the provisions of a bona fide
settlement agreement prevail over the provisions of the will."
9
In Brown we held the Texas Probate Court order finding that
the estate, administered by an independent executor, required
ongoing management and administration, did not preclude the
Commissioner from determining under Treasury Regulation 1.641(b)-
(3)(a) that administration of the estate had already been unduly
prolonged. We noted that the executor did not file the probate
proceeding until after the deficiency notice, id. at 1341, "the
nonadversary quality" of that proceeding, and the fact that the
Probate Court "was not presented with all the relevant facts and
differing views." Id. at 1342. We further observed "[n]ot only
was there no genuine controversy involved, the probate court's
order was unnecessary" and "had no practical consequences apart
from this federal tax controversy." Id. We held it was thus
"entitled to little weight." Id.
13

respect to the effect of state court decrees.10 However, as has
been frequently recognized, "[i]n enacting the charitable deduction
provisions in I.R.C. § 2055 and its predecessors, Congress sought
to encourage gifts to charity." Flanagan at 934. Typically, in
upholding charitable deductions based on court approved bona fide
settlements of adversarial positions, the decisions have stressed
that "[t]he deduction is sought for the actual benefit passing to
the charitable foundation." Id. at 935. See also Oetting v.
United States, 712 F.2d 358 at 363 (8th Cir. 1983) ("A deduction is
claimed only for those amounts that were actually received by the
four charities. The deduction should be allowed.").11 That is the
situation here, as the Estate seeks a deduction only on the basis
of what the Charities will actually receive from the Estate. Of
course, for purposes of section 2055 what is received must be
received from the decedent, and not merely from those who take the
decedent's estate. But where the settlement is a bona fide
resolution of a truly adversarial dispute as to rights of the
charity under a will of the decedent, then the foregoing
requirement would appear to be satisfied, for in such a case what
the charity receives it receives as a result and by virtue of the
10
Nor are we aware of any federal estate tax requirement or
preference for charging administrative expenses to residuary
corpus.
11
Cf. Estate of Wright v. United States, 677 F.2d 53 (9th Cir.
1982) ("The paramount concern, for federal tax purposes, is with
the real distribution of the funds rather than their nominal
source," at 54, and , "'the amount to be deducted for charitable
gifts must be computed on the basis of what the charities
actually received, not on the basis of what is provided in the
will,'" at 55).
14

provision made for it in the decedent's will, whether or not it
receives precisely what it would be entitled to if no settlement
had been made. The contrary conclusion would be necessarily
inconsistent with Rev. Rul. 89-31 as well as with such decisions as
Flanagan, Northern Trust Co., and Estate of Strock. See also
Dumont's Estate v. C.I.R., 150 F.2d 691, 692-94 (3d Cir. 1945).
We further note that the settlement and Probate Court judgment
are wholly valid and binding under Texas law, and under Texas law
control the extent to which the administrative expenses are charged
to the residuary estate for purposes of computing "the initial net
fair market value of the assets constituting" the Trusts. See
Mooney v. Harlin, 622 S.W.2d 83, 85 (Tex. 1981) (binding nature of
Texas Probate Court judgments, which are in rem). Texas law has
long recognized the "family settlement doctrine." As stated in
Matter of Estate of Hodges, 725 S.W.2d 265, 267 (Tex.
App.SQAmarillo, 1986, writ ref'd n.r.e.):
"A family settlement agreement is an alternative method
of administration in Texas that is a favorite of the law.
Salmon v. Salmon, 395 S.W.2d 29, 32 (Tex. 1965); Estate
of Morris, 577 S.W.2d 748, 755-56 (Tex. Civ.
App.SQAmarillo 1979, writ ref'd n.r.e.). The theory
underlying the validity of family settlement is stated in
Pitner v. United States, 388 F.2d 651, 656 (5th Cir.
1967):
'This approach is made possible by section 37
of the [Texas] Probate Code which provides
that when a person dies leaving a will, [. .
.] "all of his estate devised or bequeathed by
such will shall vest immediately in the
devisees or legatees;" [. . .] subject to the
payment of the decedent's debts. This
provision leaves the beneficiaries of an
estate free to arrange among themselves for
the distribution of the estate and for the
payment of expenses from that estate.'"
(Footnote omitted).
15

See also Cook v. Hamer, 309 S.W.2d 54, 56 (Tex. 1958); Wade v.
Wade, 167 S.W.2d 1008, 1010 (Tex. 1943); Everett v. Everett, 309
S.W.2d 893, 896 (Tex. Civ. App.SQWaco 1958, writ ref'd n.r.e.). In
Pitner we applied the Texas family settlement doctrine in holding
that certain postmortem attorneys' fees were deductible for estate
tax purposes as administrative expenses under Code § 2053(a)(2).
Pitner v. United States, 388 F.2d 651 (5th Cir. 1967).
Though the Tax Court in this case specifically refused to make
a finding as to whether the agreed allocation of administrative
expenses was a settlement of a bona fide dispute, the Commissioner
argues precisely this point on appeal. He claims, as he did below,
that the settlement, at least as far as it dealt with the
allocation of administrative expenses, was collusive and designed
simply to avoid payment of taxes, and that the IRS should not now
be forced to abide by a settlement in which it had no voice.
We reject the Commissioner's argument. This contention was
thoroughly tried below, and, as the Estate points out, the
Commissioner never produced any evidence with which to question the
character of the proceedings. The Estate, on the other hand,
presented the testimony of Alan Leibel, an attorney who represented
Warren's children throughout the litigation in the Probate Court.
Leibel testified that the negotiations, on the administrative
expense issue as well as others, were protracted and adversarial.
It is indisputably clear that the litigation, and its
settlement, were to resolve adversarial, nontax, bona fide disputes
between the parties.
We also note that the terms of the will provide independent
16

verification of the adversarial interests involved in the probate
contest. If all administrative expenses had been taken out of the
corpus of the residuary estate so that "the initial net fair market
value" of the assets of the Trusts would have been lower, the
annuity amount received by the Charities would likewise have been
lower. This would have benefited the children and grandchildren
because less of the estate would have been paid out to the
Charities and more would have been left to them after the twenty-
year term of the Trusts.
As calculated by the Commissioner and under the Tax Court's
judgment, the annuity payments to the Charities were $878,131 a
year, as compared to $1,471,576 per year under the Probate Court's
judgment, a difference of $593,445 a year. Over the 20-year term
this would amount to $11,868,904 more going to the Charities, and
the same amount less being available to Warren's children and
grandchildren at the termination of the Trusts (the children and
grandchildren receiving nothing from the Trusts prior to their
termination).
The Commissioner's brief makes the conclusory assertion that
because "[t]he net effect of this allocation of administrative
expenses was to reduce both the federal estate and income tax
burdens of the estate" the settlement "was not adverse to the
interests of the various parties to" it and hence was not bona fide
and adversarial. The record simply does not bear this out. The
Commissioner's position and that of the Tax Court reduced the
amount of the estate tax charitable deduction by approximately
$6,806,756 from what it would have been had the Probate Court
17

judgment been followed.12 Even as calculated by the Commissioner,
the net taxable estate was only $2,357,320, and so the maximum
estate tax rate would have been 49%. Code § 2001(c)(1). Of
course, if the Probate Court position were applied, the same estate
tax liability as resulted from the Tax Court's judgment could be
achieved without using as an estate tax deduction some $6,806,756
(the amount of the decrease in the estate tax charitable deduction)
of administrative expenses, which in turn would free that amount up
to take as an estate income tax deduction.13 The maximum income tax
rate for estates and trusts during 1983 through 1986 was fifty
percent and has been less ever since. Code § 1(e). Consequently,
the tax benefitsSQestate tax and income taxSQin regard to the
administrative expenses and the estate tax charitable deduction
could not have amounted in all to more than half the amount of the
difference in the size of the estate tax charitable deduction, or
some $3,403,378 (½ of $6,806,756). In addition to this tax
benefit, there would be, if the Probate Court judgment were
followed, the potential for increased annual income tax deductions
by the virtue of the increase in the amount of the annual annuity
payable to the Charities by $593,445. Even on the unlikely
assumption that there would be sufficient net taxable income to
realize the full potential of this increased deduction (in addition
12
The $593,445 difference in the annual annuity amount times
the appropriate 11.4699 factor (see note 6, supra) equals
$6,806,756.
13
Under Code § 642(g) an item of administrative expense may
not be taken both as an estate tax and as an income tax
deduction.
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to the hypothesized income tax deduction for administrative
expenses), over the 20-year term it would not amount to a tax
saving of over some $4,255,000.14 The total of the maximum
potential estate and income tax savings from administrative
expenses, $3,403,378, plus the maximum potential income tax savings
from the increased charitable deduction for increased annuity
payments to charity, $4,255,000, would thus be less than
$7,660,000. This would still leave more than $4,000,000
($11,868,904, the pre-tax loss to the children and grandchildren,
less $7,660,000 in maximum potential tax savings, the benefit of
which could accrue to them on termination of the Trusts) to fight
over. That is a substantial sum, and a substantial fraction of the
net estate. The Commissioner has presented no calculations
whatever to demonstrate what the potential tax savings would be or
that they would even approach the amount of the enhancement in the
position of the Charities to the detriment of the children and
grandchildren.
The record as a whole affirmatively demonstrates that the
dispute was a truly adversarial, nontax one and that the parties
reached an arms-length and bona fide settlement of that dispute
14
The top income tax for estates in the years 1983 through
1986 was 50%; in 1987 through 1990 it did not exceed 38.5%; since
then it has not exceeded 31%. See Code § 1. Assuming 3.6 years
(May 27,1983 through December 1986) at 50%, 4 years at 38.5%, and
12.4 years at 31%, the total income tax savings over the 20 years
from the increased income tax charitable deduction would be
approximately $4,253,328, calculated as follows:
3.6 x $593,445 = $2,136,440.20 x .50 = $1,068,220.10
4 x $593,445 = $2,373,780 x .385 = $ 913,905.30
12.4 x $593,445 = $7,358,718 x .31 = $2,281,202.58
TOTAL $4,253,327.98
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that was essentially approved by the Probate Court, and that what
the Charities received in the settlement and under the Probate
Court judgment accrued to them by virtue and as a result of the
bequest to them in Article V of the will. There is no substantial
evidence in the record to sustain a contrary finding.
Consequently, there is no need for a remand to the Tax Court for a
fact finding on that issue. We further determine that the
settlement and Probate Court decree are valid and binding under
Texas law, particularly the Texas family settlement doctrine. In
these circumstances, we conclude that the approach of Rev. Rul. 89-
31, rather than of Bosch, is appropriate, and that the estate tax
charitable deduction should be computed on the basis of what the
Charities will receive under Article V of the will pursuant to the
Probate Court's judgment.
Conclusion
We hold that the estate tax charitable deduction must be
computed on the basis of what the Charities will receive under
Article V of the will pursuant to the Probate Court's judgment, and
that the Tax Court erred in holding to the contrary. We
accordingly reverse the judgment of the Tax Court and remand the
case to that court for further proceedings consistent herewith,
including recalculation of the appropriate estate tax in conformity
with our holding.
JUDGMENT REVERSED; CAUSE REMANDED
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